Charter Communications Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2024

Key Takeaways

  • Charter lost 61,000 Internet customers in Q4 and faces outsized churn impacts due to intensified fixed wireless and wireline overbuild competition in its existing footprint.
  • The company added nearly 2,500,000 Spectrum Mobile lines in 2023, reaching 7.7 million total lines, with Spectrum 1 convergence driving significant churn reduction and room for penetration growth (currently 13%).
  • Charter activated 420,000 subsidized rural passings and added 34,000 net rural customers in Q4, and plans to deploy ~450,000 new rural passings in 2024 to extend broadband into underserved areas.
  • 2024 capital expenditures are guided at $12.2–12.4 billion (including $4.5 billion for line extensions and $1.6 billion for network evolution), with total CapEx expected to decline to ~$8 billion by 2027.
  • The Affordable Connectivity Program (ACP) may end this spring, risking disruption for over 5 million subsidized customers; Charter is designing alternative support but expects short-term subscriber headwinds.
AI Generated. May Contain Errors.
Earnings Conference Call
Charter Communications Q4 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Hello, and welcome to the Charter Communications Q4 Conference Call. We ask that you please hold all questions until the completion of the formal remarks, Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to turn the call over to Stephen Anninger.

Speaker 1

Thanks, operator, and welcome, everyone. The presentation that accompanies this call can be found on our website, ir. Charter.com. I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, which we encourage you to read carefully. Various remarks that we make on today's call concerning expectations, predictions, plans and prospects constitute forward looking statements, which are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results.

Speaker 1

Any forward looking statements reflect management's current view only and Charter undertakes no obligation to revise or update such statements. On today's call, we have Chris Winfrey, our President and CEO and Jessica Fisher, our CFO. With that, let's turn the call over to Chris.

Speaker 2

Thanks, Stefan. In 2023, we added 155,000 Internet customers and we added nearly 2,500,000 Spectrum Mobile lines for growth of nearly 50%. At the end of 2023, we had more than 7,700,000 mobile lines. Only 13% of our Internet customers now have mobile service. And we expect mobile penetration to meaningfully grow over the next several years as the quality and value of our converged connectivity services gains wider recognition.

Speaker 2

Revenue was up by 1% in 2023, while EBITDA grew by 1.3% and 2.5% when excluding advertising. While we're executing well on our long term strategic initiatives Spectrum 1 is working to drive mobile growth. Internet growth in our existing footprint has been challenging, driven by admittedly more persistent competition from fixed wireless and similar levels of wireline overbuild activity. Small changes in gross additions and churn in a low transaction environment have driven outsized impacts to net gains, was clearly the case as we move through the last quarter. I own that.

Speaker 2

So let me start with what we believe on the competitive environment And then what we're doing to drive long term growth by delivering high quality products and service at a great price. Fixed wireless access, while an inferior product with limited capacity and geographic coverage, which is fluid is often marketed by the phone companies at a perceived lower price to their existing customers. We continue to believe the impact from fixed wireless is temporary. Our Internet product is faster and more reliable. Our pricing is lower when similarly bundled with mobile.

Speaker 2

Customer bandwidth needs continue to increase And MNOs will face capacity challenges that will be required to allocate their spectrum and capital to maintain profitable mobile services. While we can't promise when that happens, I believe bandwidth needs increase and quality and value win. On the wireline overbuild front, we continue to compete well. Overbuild impact tends to be limited to a few percentage points of Internet penetration during the 1st year of a new overbuild vintage coming online. It's painful, but it's tied to the pace of overbuilt.

Speaker 2

We don't see overbuilders reaching their penetration and ROI goals now within our footprint now or in the future. They don't have the same ubiquitous convergence capabilities as we do. The lower cost passings have likely been built. Some of the planned overbuild was duplicative between operators meeting less opportunity and incremental financing costs have increased, putting even more pressure on overbuilder returns. We also expect bead passings will provide better capital allocation and ROI for many of these operators.

Speaker 2

Our assumption is that our competitors are rational economic players with shareholders and balance sheets, which require adequate return on investment. That isn't within our control. So we are focused on the key strategic initiatives that enhance our long term competitiveness and growth capabilities We expect to return to a more normalized Internet growth over time. Just over a year from when we detailed those initiatives, I wanted to remind everyone of their rationale and update you on their status as laid out on Slide 4. Our footprint expansion is beating our pacing, penetration, ARPU and ROI targets.

Speaker 2

New construction will help drive Internet customer growth despite the temporary challenges I mentioned within our existing footprint. 2023 subsidized rural customer growth was already over 100,000. Our penetration also continues to grow at a better than expected pace and we'll cover more we'll activate more subsidized rule passings this year, both of which Jessica will cover. BEED will provide additional opportunities, although the potential is uncertain given our concerns regarding how states We'll apply NTIA guidelines. We'll focus BEED investments in states where the rules are conducive to private investment.

Speaker 2

Outside of rural, we also have accelerated greenfield market fill in and serviceability builds expanding our existing footprint in both residential and commercial passings. Penetration curves and returns here are similarly strong and predictable with a lower billing cost. We also remain committed to prioritizing the customer experience via our initiative, which is intended to enhance frontline employees tenure while simultaneously investing in digitization, all to drive better sales yields, higher quality transactions, lower overall service transactions and higher levels of customer satisfaction. Our targeted investments in employees over the last 2 years resulted in a significant reduction in employee attrition in 2023. Our investments in the digitization of service is also driving efficiencies.

Speaker 2

In 2024, we have a number of new automated platforms that are launching to facilitate better service for customers and better digital and AI tools for agents to enhance service quality and the quality of their day to day jobs. And finally, our evolution initiative, which includes our network evolution project, our convergence efforts and our video product development all remain on course. We fully launched symmetrical speed tiers in 2 markets and currently launching in 6 more, completing our step 1 markets. We'll also begin to work in our step 2 markets with DAA later this year. Excluding the benefit of any savings that result from the project, we continue to expect our network evolution to cost a very low $100 per passing.

Speaker 2

We expect to complete the project in 2026. So fast, ubiquitous, low cost upgrade of our capabilities, which our competitors can't replicate. Our converged product offering also continues to evolve and grow. Spectrum 1 is performing well and offers the fastest connectivity with differentiated features like mobile speed boost and the Spectrum mobile network. Spectrum 1 also offers significant savings for customers with market leading pricing at both promotion and at retail.

Speaker 2

The Spectrum 1 customers reaching their 1st anniversary are performing ahead of our expectations. We'll continue to evolve our converged offering in 2024 with additional features and capabilities. Finally, turning to the evolution of our video product. In October, we launched the Xumo platform across our entire footprint. This industry leading video platform allows our customers to access their linear and direct to consumer video content with unified search and discovery within one easy to use interface.

Speaker 2

Combined with our Spectrum TV app, the most viewed linear MVPD streaming service in the U. S, Xumo is our go to market platform for new video sales. We're approaching 1,000,000 deployed Sumo Boxes since launch and we've been getting great customer feedback and we can keep improving our attach rates. In early January, Disney Plus became available to all Spectrum TV Select customers nationwide at no additional cost. In the next several months, ESPN plus and VIX, a Spanish language DTC product will both become available to certain TV Select customers at no extra cost.

Speaker 2

This new hybrid distribution model is good for consumers and we plan to modernize all of our distribution agreements upon renewal. That means packaging flexibility, value and not asking customers or Charter to pay twice for similar DTC and linear programming. Our new hybrid distribution model combined with Xumo's content forward interface provides a clear path to solve key customer issues of choice, value and utility seamless linear DTC and SVOD integration and advanced search and discovery functionality. When we reflect on our key initiatives and what we believe are the short term market challenges, we're acting as long term charter shareholders to maximize value. So we have a posture of expectancy and excitement for the opportunity to execute on initiatives that enhance our long term growth rate and value for Charter shareholders.

Speaker 2

In the short term, we are leaving no stone unturned as it relates to our go to market approach. Ultimately, the speed at which we can return to a more normalized broadband growth rate hinges on the assumption that our competitive capital is not limitless for poor ROI projects and frankly our execution on our strategic initiatives. So we're keeping our heads down and executing on a clear strategy to ensure we can offer customers the best products and services across our entire footprint, all while saving customers money not only now but in the future. And with that, I'll turn the call over to Jessica.

Speaker 3

Thanks, Chris. Let's turn to our customer results on Slide 6. Including residential and SMB, we lost 61,000 Internet customers in the 4th quarter, while video customers declined by 257,000. In mobile, we added 546,000 mobile lines and wireline voice customers declined by 251,000. Our Spectrum 1 product continued to perform well.

Speaker 3

Customers that signed up for our Spectrum 1 product in the Q4 of 2022 reached their 12 month anniversary this past quarter. Those promotional roll offs didn't drive incremental Internet churn. In the quarter, we had slightly lower mobile line gross adds year over year tied to Internet gross with a lower churn rate year over year and flat sequentially. We continue to see healthy data usage on our SPECTRUM-one promotional lines and remain confident that these lines will perform well as long term customers. Turning to rural, We ended the year with 420,000 subsidized rural passings and grew those passings by 295,000 in 2023, in line with our target, and by $105,000 in the 4th quarter alone, an acceleration from this $78,000 we activated during the 3rd quarter.

Speaker 3

Customer growth in our subsidized rural footprint also accelerated with 34,000 net customer additions in the quarter. As Slide 13 shows, we're generating customer penetrations of close to 50% in cohorts that have reached or passed the 12 month mark. In 2024, we expect to activate approximately 450,000 new subsidized rural passing, about 50% more than in 2023, with seasonality in the Q1 tied to the winter weather. Slide 12 shows that so far with additional state bids that we expect, We will have committed to build approximately $1,750,000 subsidized rural passing. We also expect our RDOF build to be completed by the end of 2 years ahead of schedule.

Speaker 3

Moving to financial results starting on Slide 7. Over the last year, residential customers declined by 0.3% with video only customer churn partly offset by new customer growth driven by Internet. Residential revenue per customer relationship was up 0.1% year over year, given promotional rate step ups, rate adjustments and the growth of Spectrum Mobile mostly offset by a higher mix of non video customers and growth of lower priced video packages within our base. As Slide 7 shows, in total residential revenue was flat year over year. Residential Internet ARPU grew by 2.2% year over year, but by 3.4% when excluding the impact Spectrum 1 GAAP revenue allocation out of Internet into mobile.

Speaker 3

Turning to commercial, SMB revenue declined by 0.9% year over year, reflecting lower monthly SMB revenue per SMB customer, primarily due to a higher mix of lower priced video packages and a lower number of voice lines per SMB customer. These factors were partly offset by SMB customer growth of 0.7% year over year. Enterprise revenue grew 3.8% year over year driven by enterprise PSU growth of 6.5% year over year. Excluding all wholesale revenue, enterprise revenue grew by 6.1%. 4th quarter advertising revenue declined by 23.4 percent or $130,000,000 year over year due to less political revenue.

Speaker 3

Core ad revenue was down 0.7% year over year due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew by 24.4 percent year over year driven by higher mobile device sales. And in total, consolidated 4th quarter revenue was up 0.3% year over year and up 1.3% year over year when excluding advertising. Moving to operating expenses and adjusted EBITDA on Slide 8. In the 4th quarter, total operating expenses declined by 0.7% year over year.

Speaker 3

Programming costs declined by 10.6% year over year due to a decline in video customers of 6.8% year over year and a higher mix of lighter video packages. These factors were partly offset by higher programming rates. For the full year 2024, we expect programming cost per video customer to grow in the 1% to 2% range year over year with our video package mix being the largest variable. Other cost of revenue increased by 15%, primarily driven by higher mobile device sales and other mobile direct costs, partly offset by lower ad sales costs. Cost to service customers increased by 2.1% year over year, driven by additional activity to support the growth of Spectrum Mobile, partly offset by productivity improvements, including from tenure investments and lower service transactions per customer.

Speaker 3

Looking forward, I would note that our previous investments related to job structure, pay and benefits to build a more skilled and longer tenured workforce are now largely complete and service transaction trends are back on trajectory after the programming dispute in September. Sales and marketing costs declined by 1.6% primarily driven by lower labor costs. Finally, other expenses grew by 1.5% driven by labor costs. Adjusted EBITDA grew by 1.6% year over year in the quarter and by 3.6 when excluding advertising. Turning to net income on Slide 9, we generated $1,100,000,000 of net income to Charter shareholders in the 4th quarter, down from $1,200,000,000 last year, driven by a pension re measurement loss and higher interest expense, partly offset by a gain on the sale of towers and higher adjusted EBITDA.

Speaker 3

Turning to Slide 10, capital expenditures totaled $2,900,000,000 in the 4th quarter, just below last year's 4th quarter spend. Line extension spend totaled $978,000,000 $50,000,000 higher than last year driven by our subsidized rural construction initiative and increased residential and commercial greenfields and market fill in opportunity. 4th quarter capital expenditures excluding line totaled $1,900,000,000 compared to $2,000,000,000 in the Q4 of 2022, driven by and lower spend on CPE due to purchase timing, partly offset by higher spend on upgrade rebuild, primarily network evolution. For the full year 2023, we spent $11,100,000,000 Looking ahead at full year 2024, we expect capital expenditures to total between $12,200,000,000 $12,400,000,000 including line extensions of approximately $4,500,000,000 and network evolution spend of approximately 1,600,000,000 On Slide 11, we've provided our current expectations for capital spending through the year 2027, excluding any possible line spend associated with the BEED program. The slide divides our spending into 3 categories: line extensions, network evolution and core CapEx spend.

Speaker 3

As the slide shows, we expect CapEx spend of just over $12,000,000,000 in 2024 to fall to approximately $8,000,000,000 by 2027. Our line extension CapEx includes spending for greenfield, market fill in and serviceability builds from our legacy footprint, driving continued expansion of residential and commercial passing. In turn, our non rural passings growth should continue to be robust and similar to 2023 growth, subject to the pace of overall housing growth. These passings are natural extensions or pocket fill ins to our network and have a long track record of low cost per passing and reliable penetration trends to growth at attractive ROI. We've not included the potential impact of BEED in the passing figures on Slide 12 or in our CapEx outlook on Slide 11, given the regulatory and bidding uncertainty associated with the program.

Speaker 3

We don't expect any subject to acceptable guidelines as Chris mentioned to begin until 2025. And similar to our peers and competitors, Our success in BEED will be an overlay to our capital expenditure outlook. Turning to network solution where our long term capital expenditures outlook remains essentially unchanged. We continue to expect to spend approximately $100 per passing to evolve our network to offer multi gigabit speeds. Finally, core capital expenditures, which excludes line extensions and network evolution, has remained consistent of revenue since 2021.

Speaker 3

And following the completion of our network evolution initiative, capital expenditures excluding line extensions as a percentage of revenue should decline to below 2022 level, which has important long term cash flow implications. Turning to free cash flow on Slide 14. Free cash flow in the 4th quarter totaled $1,100,000,000 a decrease of $75,000,000 compared to last year. The decline was primarily driven by a less favorable change in accrued expenses related to capital expenditures, partly offset by an increase in net cash flows from operating activities and a decrease in capital expenditures. Just a brief comment on cash taxes for 2024 before turning to the balance sheet.

Speaker 3

We currently expect our calendar year 2024 cash tax payments under current legislation to land between 1,500,000,000 and $1,900,000,000 depending on a number of factors. We finished the quarter with 97 point $1,000,000,000 in debt principal. In the 1st weeks of 2024, we redeemed all of our outstanding 2024 senior secured floating rate notes and paid in full all of our outstanding 2024 senior secured notes. So we no longer have any significant debt maturities due in 2024. Our current run rate annualized cash interest is $5,200,000,000 Given our long dated and 86% fixed rate debt structure, Our sensitivity to higher rates is relatively low.

Speaker 3

If we refinanced all of our debt due in the next 3 years at current rates, the impact to our run rate interest expense less than $90,000,000 or 2% of that run rate interest expense. As of the end of the 4th quarter, our ratio of net debt to last 12 month adjusted EBITDA was 4.42 times and we intend to stay at or just below the high end of our 4 to 4.5 times target leverage range. During the quarter, we repurchased 3,200,000 Charter shares and Charter Holdings common units totaling $1,300,000,000 at an average price of $4.19 per share. Before turning the call over to Q and A, I want to make a few comments regarding the affordable connectivity program for Internet and mobile customers. While we still hope the ACP program will be allocated additional funding, We're well aware that the program could end this spring and we're designing programs to assist those that are on the HCP program.

Speaker 3

There is no doubt that the end of the program would be disruptive for many. Nonetheless, we will have the full benefit of our high quality sales and retention force as well as our mobile product, which saves customers 100 of dollars to preserve connections. With the continued temporary impact from wireless and the potential end of ACP, we may continue to face short term customer growth headwinds as we enter 2024. Despite those short term challenges, we are competing well and are focused on driving healthy EBITDA growth in 2024. A component of that has been to reflect inflation in our pricing while preserving value to our customers.

Speaker 3

We're also actively managing expenses And we believe we can do so without impacting our sales, service and broader growth initiatives. But most importantly, we remain focused on the long and a return to more normalized Internet growth. We have what we believe are the best products at the best prices in our industry and we remain underpenetrated relative to our long term potential. Taking advantage of that opportunity is what will ultimately create the most shareholder value. Operator, we're now ready for Q and

Operator

Thank you. Our first question will come from Jonathan Chaplin with New Street Research. Your line is now open.

Speaker 4

Thanks, guys. One for Chris and one for Jessica. For Chris, I'm wondering if you can give us some context on whether there was a change in competitive dynamics in the Q4. As we look out across the fixed wireless guys and the fiber guys, It seemed pretty steady over the course of the last few quarters, the sort of competitive pressures that seem to stabilize. And I'm wondering if there was just a bigger focus on from fixed wireless or potentially fiber in your market specifically.

Speaker 4

And then for Jessica, the cash tax guidance is great. If bonus depreciation is expanded extended this year, how much would that cash tax go down by? Thank you.

Speaker 2

Good. So in terms of the competitive environment in the 4th quarter, as you mentioned, we saw some continued fixed wireless footprint within the quarter. We also saw heavier competitive marketing and some aggressive promotions from both fixed wireless and from the over builders. As you know, Jonathan, slight impacts to gross adds and churn. In this case, it was particularly on the gross adds front, can drive what appear to be outsized changes to net adds, especially when net adds are slightly positive or slightly negative really has an outsized impact.

Speaker 2

As you know, we're Of course, we're focused very much on the long term, but that doesn't mean that we're not focused on the short term either, particularly what was going on inside of the Q4. So as I mentioned in the prepared remarks, we're really leaving no stone unturned on potential ways to improve go to market in the short term, particularly addressing gross adds in the existing footprint. We're doing all that though looking at all aspects, but trying to make sure that we do that in a controlled fashion and don't overreact either given that it is small changes that are driving an outsized impact here.

Speaker 3

Yes. And I'd add on, the environment wasn't consistent through the quarter. Early on, we had some carryover from the Disney dispute in the August rate event that we talked about in last quarter's call. We had expected November December to recover to the levels that we had seen going into that event, and they didn't. But as we exited the quarter, we saw December slightly negative and January net adds are consistent with what we saw in December.

Speaker 3

So that environment does continue. On the cash tax side, Jonathan, It's not just bonus, it's also R and D and interest expense deductions that will impact us. But I would say the reforms that are being considered support the economics of our investments in connecting rural America and upgrading the network. And So we are fully in support of them. I think it's a little premature to adjust our guidance, but given the investments we're making, we do expect there to be a material benefit to cash taxes if the legislation were to go through.

Speaker 4

Great. Thanks guys.

Speaker 1

Thanks, Jonathan. Luke, we'll take our next question, please.

Operator

Our next question will come from the line of Craig Moffett with MoffettNathanson. Your line is now open.

Speaker 5

Hi, thank you. A couple of questions. Jessica, thank you for the comments you made about ACP. I'm wondering if you can just Try to quantify a little bit more for us, the number of ACP subscribers that you have and if you have insight into How many of those are new subscribers versus previously were paying subscribers? And then I wonder if you could also just comment About T Mobile indicated that they expect 100,000 to 150,000 fewer net adds per quarter in fixed wireless, how do you think about that flowing into your footprint?

Speaker 5

And does that inform the way you think about the broadband growth rate going forward?

Speaker 2

So maybe I start off with ACP and just take a step back. And then Jessica can answer what you were requesting. ACP program, I think as everybody knows, it really has brought Internet connectivity to customers who would not have been able to have access to broadband otherwise. But more importantly, it's allowed customers who would have been coming in and out of broadband marketplace given affordability issues to remain connected consistently. So we really think, as you know, it's been an effective program, we're proud to be the largest ACP provider in the country.

Speaker 2

We still we're hopeful that the ACP can be refunded in order to keep households that are in the program today connected to the Internet. But if it's not refunded, Craig, we're going to work very hard to keep customers connected. And we've been working on this possibility for some time. We have significant tools to save customers 100 or even 1,000 of dollars as Jessica mentioned. And I'd highlight that keep in mind most of our ACP customers were Internet customers before the ACP program began.

Speaker 2

And In the meantime, having said all that, it's actually pretty challenging for us to predict the impact that a potential end of the program is going to have to our customer disconnects. We're going to report that consistently over time.

Speaker 3

Yes. And so on the numbers side, Craig, We have a little over 5,000,000 households that received the ACP benefit, all for wireline Internet. Very few of those customers used ACPA to upgrade to higher speeds or take more PSUs when they began receiving the benefit. But many do have our flagship speed or higher or do take other services from us. So And I guess the funding will continue through April.

Speaker 3

We'll try to keep people informed as we move through the process. But from our perspective, there's not a lot of visibility at this point as to anything that might happen when the program ends.

Speaker 2

In the end, we're still focused on trying to make sure that ACP is refunded and I still think there's a strong possibility that could be the case.

Speaker 3

Yes. Do you want to talk to the fixed wireless lower net add guidance?

Speaker 2

Sure. So we noted the same thing that you saw, Craig. I think the bigger point there is that, there is A rational approach to the marketplace and the utilization of spectrum and I believe a recognition that there's a limited amount of capacity that bandwidth needs are increasing. Think that was the bigger takeaway from us. It's very difficult for us to sit back and take a look at the geographic footprint of fixed wireless access because it almost changes by the day in terms of sector availability on radius in terms of capacity and where they're actively marketing and where they're not.

Speaker 2

And then you have the additional Rural footprint versus urban and suburban and what would be off footprint for us versus on footprint And the split between residential and commercial, which makes it pretty difficult to mathematically cascade that into an impact for us. But I thought it was rational, what was said, and I thought it made a lot of sense. And I think it's consistent with what we've always thought. Frankly, the piece that's been more difficult is just the timing in terms of where that capacity is reached and it's been a little bit harder to predict than we would like. But I took that as the same way that you did is that it should have some positive impact on our existing footprint.

Speaker 1

Thanks, Craig. Yes. Luke, we'll take our next question please.

Operator

Our next question will come from the line of Benjamin Swinburne Morgan Stanley. Your line is now open.

Speaker 6

Good morning. Chris, question for you on CapEx and then I want to ask Jessica about sort of EBITDA growth. Chris, you've been around the cable industry for a long time. So I know you are aware that kind of investment priorities can change over time. And I'm just Curious why you felt it made sense to sort of guide out to 2027, just because you're in a competitive dynamic industry and want to evolve your strategy over time.

Speaker 6

And I did seem like you guys have and you can disagree, but it seems like you've prioritized the line extensions over getting network evolution done by 2025. So I know we thought it might slip into 26, but now it's definitely slipping into Just wanted to understand your thought process there, if that was tied to kind of equipment availability or just a strategic decision. And then Jessica, there's an expectation that 2024 is a good EBITDA growth year for Charter given the investments you've made in OpEx. I think you cited 3.5% growth in Q4 ex advertising. Anything you can tell us to help us think about financial for the business in 2024 would be appreciated.

Speaker 6

Thanks everyone.

Speaker 2

Sure. So Ben, I think Leading into the last earnings call, we had been listening to shareholder feedback about The difficulty people were having of projecting long term CapEx trends given the significant capital investment opportunities that we have. And You're right. Typically, we would never provide a multiyear outlook and we've about the only guidance that we've historically provided is in your CapEx guidance. But These are unique opportunities that don't come around very often.

Speaker 2

The opportunity to have subsidized rural build, having the largest expansion of broadband and cable footprint really since 1980s is unique and it's generational. And I think we felt that investors needed to see, A, The size and magnitude of what we were already committed to and B, to have a very articulated outline of the returns of those investments, which Jessica has provided. We've been providing that all that information essentially will be provided over the past 2 years, but to do it in a single spot, so people could wrap their heads around both the quantum that exist, the investment returns that are attached that investment and that it doesn't go on into perpetuity and that there is a real nice setup for what this is all about, which is free cash flow growth. And so while we typically like to keep our cards close to our chest to preserve both flexibility and to maintain our competitive posture, we felt there was a trade off here to make sure that our shareholders were with us and that people understood the value of the returns of the investment that we're making. And so there's a balance here between One hand, having the flexibility to always make the right decisions to generate long term free cash flow and making sure that we're responsive to shareholder feedback along the way that we can demonstrate the long term value so people take comfort with that.

Speaker 2

In terms of the prioritization of line extensions over the DAA or DOCSIS 4 upgrade, it wasn't so much about prioritization. It was really about certification of the DAA equipment taking a little bit longer, which was pushing out the timeline for the rollout. And so the trade off we had is could you do it the 1.2 gigahertz high split upgrade under what we call an integrated CMTS environment and do more of that footprint to keep the original pace or should we slow it down just a tad to make sure that we allowed for catch up of the DAA certification process so that you can move to high split with distributed access architecture as well as the 1.8 gigahertz and the rollout of DOCSIS 4.0, we chose the latter to make sure that we were having as much of the footprint with the full capabilities of DOCSIS 4.0 over time. If The caveat is if we get into a couple of years from now, we see opportunities to pull capital forward. We'll of course do that, but this is our best view of where we're going to spend capital.

Speaker 2

And we thought it was worthwhile to show that to make sure people understand that doesn't that higher level of capital expenditure doesn't go on into perpetuity.

Speaker 3

Yes. On the EBITDA performance inside of 2024, I guess, I'm not going to give EBITDA guidance, but I think we can talk about the few things. So you do have a political advertising year that is a tailwind. We have so we fully lapped the investments that we made in the employee population and from an expense outlook perspective. I think my expectation is that we'll be able to keep cost to serve essentially flat on an absolute basis.

Speaker 3

And in sales and marketing, you might have some growth, but it will be small in the 2% to 3% range. And We continue, as I said in my remarks, we're taking a look at expenses all across the business to identify areas where we can be more efficient and reduced costs without impacting our service levels and our sales capabilities. And so We fully understand that we need to maintain EBITDA growth in this environment and strong EBITDA growth coming into what as you note should be a stronger year. In order to be able to continue focusing on what we want for the long term, which is to be able to invest to grow in the long term and to return to that Internet customer growth in the long term. So I think the dynamics in the background are happening to make that growth happen.

Speaker 1

That's

Speaker 3

where we are.

Speaker 4

Okay. Thank you.

Speaker 1

Thanks, Ben. Thanks, Ben. Luke, we'll take our next question, please.

Operator

Our next question will come from the line of John Hodulik with UBS. Your line is now open.

Speaker 5

Great. Thanks and thanks for that color, Jessica. Just a follow-up on EBITDA growth and one of the components of revenue per customer, it's been relatively flat for the last couple of quarters. And there's a lot of moving parts in terms of pricing And customers rolling off Spectrum 1, but how should we think of that progressing through 'twenty four, I think the most recent data price increase in August. And do you believe your pricing power in the broadband market has change given the new sort of competitive landscape we have or can you continue to push pricing as that laps midyear, number 1?

Speaker 5

Then on the mobile strategy, anything you can tell us about what mobile is doing in terms of lowering churn in the broadband Is it also helping you in terms of new connects and driving new subscribers or just really churn reduction? And then anything we should expect to change as sort of proceed with some of the build out measures you're taking to add your own capacity?

Speaker 3

Yes. So I'll start with ARPU. When you look at average revenue per customer overall, John, the biggest factor that's keeping it flat is the rate of video penetration. So what matters there is the extent to which we can retain video customers with some of the package and pricing strategies that we have. If you isolate and you sort of pull out, Internet ARPU, You can see even in the remarks that I made on the quarter that Internet ARPU continues to grow and when you pull out the Spectrum 1 mobile allocation continues to grow at a rate that's consistent or even a little higher than historical level.

Speaker 3

On the mobile side, I talked about it on the last call. As you have so because we've sort of lapped the free line offer. The number of free lines that we have in the system over the course of 2024 is more steady than it was in 2023. So you'll also see that the impact of that mobile allocation over to The Internet should steady over time. And you'll have just as a matter of math, more paying customers in the base as a proportion relative to the free lines.

Speaker 3

So I think that's the piece there. I don't know, Chris, you want to talk about pricing power?

Speaker 2

Sure. And broadband, our fundamental view hasn't changed that in the long term, keeping Your prices as low as you can both enhances your ability to grow and that's still our long term objective. It reduces churn and it reduces the likelihood that somebody views you as an attractive overbuilt candidate. So our fundamental views haven't changed. Having said that, we've had inflationary pressures And we've been passing that through to the best of our ability.

Speaker 2

To the extent that our pricing is lower and it is For the most part across the industry, I view that as a positive long term capacity question and from an ability to grow. But it doesn't mean that we're immune to inflation. It doesn't mean that we're not willing to pass through increases as we need to. And there's a balance here as well that in an environment where we're investing so much into expansion and making sure that we do maintain EBITDA growth rate that we can keep that engine going is it matters to us and it matters to our shareholders and we're focused on that in parallel. So there's a balance that's taking place.

Speaker 2

I think we're in a not only in a good position overall, but I think a very good relative position. In terms of the overall market, You've seen different operators across the sector moving their prices up over time as well. And I think that demonstrates that there's real value to the product and there's a need to recover costs along the way. It's a capital intensive business. And then your last question on, John, is mobile churn, The contribution of mobile to the broadband business, the biggest factor so far as you highlighted really has been a significant and a very material amount of churn reduction that takes place on those Customers who attach mobile.

Speaker 2

As I mentioned, it's only 13% of our base today. And I'd offer you 2 pieces. 1 is on the positive side, it is dramatic, The churn reduction. On the just to be balanced, there's still self selection that exists inside that base. So I want to be careful that we don't overplay the benefit there on what's still a relatively small portion of our Internet base and growing and has big upside.

Speaker 2

The new connects, Those new Internet connects who take mobile, that percentage of our mobile acquisition mix that comes from new customers has risen over the years. Is that because we do a better job of selling into call center and attaching or is it because mobile is actually driving gross adds? In this environment where you have so many different moving parts, I'm not comfortable telling you that it's been a big driver as of yet of new sales. But I think that's the opportunity, not only for churn reduction, but as convergence continues to take hold as these products work together in a way that our competitors can't replicate. The ability to use Spectrum 1, the combination of broadband Internet, WiFi and 5 gs is our backup radio.

Speaker 2

It's the slowest portion of our network and have the fastest overall connectivity service and seamless connectivity makes it powerful. And I think it has the ability not just reduce churn, which it's already doing today, but to actually drive acquisition over time. And so we're early on, but Still very exciting.

Speaker 5

Thank you.

Speaker 1

Thanks, John. Luke, we'll take our next question, please. Thanks.

Operator

Our next question will come from the line of Peter Cepino with Wolfe Research. Your line is now open.

Speaker 7

Good morning. I have a couple of questions on the subject of growth investment. Slide 11 discusses cost per core passing in your forecast of $2,000 to $2,500 and that struck me as high relative historical core passings and even relative to fiber expansion. And so I wanted to see what you could share about your assumptions for penetration and ARPU in that footprint. And then on a related note, again, on core growth investment, But moving over to bead, we've seen big increases over the last couple of years since the money for bead was allocated In the availability and uptake of fixed wireless services over mid band, we expect more increases in the availability of LEO satellite Not just StarLink, but Amazon's product.

Speaker 7

And so I'm wondering if your outlook for penetration in that potential bead footprint is moderating and if that affects your appetite at all? Thank you.

Speaker 3

Yes. So I'll start on the cost perpattane question. What you see there is related to the mix between commercial and even enterprise passings and residential passing. So the cost per resi passing that lives inside of that is closer to $1500 What's happening is that there are, I'm going to say, a smaller number, but a larger dollar amount of commercial passings that are included in the mix that drives the average cost per passing to be a little bit higher. And We're just trying to give enough information there to get you to a reasonable passings estimate, so that you can model off of that what gains you would generate from the build.

Speaker 2

And then in terms of the penetration, Peter, the There's very different types of build that sits in there. I mean, serviceability, which is where a customer calls us effectively for a one off or 2 or 3 additional line extensions. The Penetration on that's 85% as it should be. And other areas where greenfield or market fill in where penetrations range anywhere between 45% 70% and at a lower cost per passing as Jessica highlighted than some of the other extension build that we do. So the returns are very, very attractive.

Speaker 2

They always have been. There's nothing really new there. And somewhat tied to that, you asked about Our views on penetration generally, but in the context of speed with fixed wireless access or low earth orbit satellite LEO. I think the let me start with Leo. This is an expensive offering on a per month basis, expensive from a CPE standpoint.

Speaker 2

It needs to be because the if I told you our network was going to fall to the ground every 6 to 8 years and burn up, you'd tell me that's a pretty capital intensive business that needs to be priced appropriately and it is. I think LEO has a really good use in certain cases, but it's typically not going to be where our fiber based network is deployed. And so it's not something that really has risen too much in terms of our thinking in penetration. Fixed wireless access, It's shown us that you can have lower quality and inferior service at a low price or low incremental price And there's a market for that. But our penetration expectations for RDOF and for subsidized rural and what will feed into bead were already low in terms of what we've built into our models compared to what I think ultimately will achieve.

Speaker 2

And so I think that's already reflected inside of Our penetrations, if you think about just at the 12 month mark where we're approaching close to 50% in the subsidized world passings, Our initial thoughts were we'd be at half of that within a year. And so we're way ahead of that. And I think the terminal penetration will be higher than what we thought at RDOF despite the fact that there's an admittedly stronger fixed wireless access presence now than there was 3, 4 years ago when we made those commitments. So All a big roundabout way to say, I think it's factored into all of our thinking. And I don't think it changes our view in terms of where we'll ultimately get to for terminal penetration because we weren't overly aggressive in what we assumed.

Speaker 3

Yes. And We mentioned the less than 50% or the 50% or so at about the 12 month plus mark. But as you can see and what we provided in all of the cohorts that we're We're still growing at a good rate at that point. So it's not as though you've reached the customers who are going to get your product And then we're not seeing additional growth. We're still seeing good growth in those markets even at that vintage.

Speaker 2

It's early. It's going well.

Speaker 1

Operator, we'll take our next question please.

Operator

Our next question comes from the line of Spas Giannopetti with JPMorgan. Your line is now open.

Speaker 5

Hi, thanks for taking the question. I just wanted to follow-up on the competitive environment, just based upon the previous response. Just any help On thinking about the fixed wireless impact in terms of your is that just isolated or the competitive environment that has perhaps shifted in 4Q and persisted into January. Is that isolated in your non fiber overlap territories? Are you seeing that as well be somewhat impactful in terms of share as well in the 1 gig market?

Speaker 5

And a quick follow-up to that, Any update we can get on overlap for fiber as it stands exiting the year? And then on the CBRS build out, obviously, your peer Comcast have been testing along with you for quite a while, but they're live in Philadelphia as perhaps as well as some other markets. Any update on how the team is thinking about CBRS and how you're perhaps offload strategy over the next several years? Thank you.

Speaker 2

There's a lot there, Sebastiano. But here we go. So fixed wireless impact, it is, it's where they've deployed and it's in both fiber and non fiber overlap. It's more acute in the non fiber overlap because it's the first time that somebody's had what they view as an alternative other than DSL. So it has a novelty factor in the non overbuild footprint that is similar to a fiber overbuild that has an immediate short term impact when it's new into the marketplace.

Speaker 2

So it has a more pronounced impact there. But I think the overbuilders, the wireline overbuilders you the fixed wireless access probably has had an impact on them as well. So it's not that it doesn't have an impact in an overbuilt territory is just much more pronounced in an area where the overbuild doesn't exist. Our overbuild percentage In our 10 ks today, I think we disclosed as well that it's roughly 50% in terms of overbuild. And then as it relates to CBRS, we are fully deployed and active With thousands of radio access networks out on The Strand and MDUs in one large market today And we're expanding into another market at some point this year and that's going very well.

Speaker 2

And The pacing of that really is dictated by a few things. One is our relationship with Verizon is good and strong. The economics are great. And this is an ROI based deployment. So it will be there.

Speaker 2

The returns will be there when we deploy. But interestingly, the more penetrated we become, the more attractive the returns get. And so from a deployment of capital perspective, CBRS is very exciting. It's a very clear mathematical return, but in an environment where we're deploying as much capital as we are and we have so much active activity on the outside plant In terms of high split upgrade and construction of new networks, we're just pacing it along the way to manage all those factors And the way that we think about deployment of CBRS, but we're going to fully deploy it. It's exciting.

Speaker 2

It has a great return. The depth at which we employed in each market, It really is a function of utilization on a geographically specific area and the attractive agreement and the great relationship that we have with Verizon today. So that's strategic to us. So all those factors play into the timing. Thank you.

Operator

Thank you. That was our last question. I'll now turn the call back over to Stefan Anninger.

Speaker 1

Thanks, operator. Thanks, everyone. We'll see you next quarter. Thank you very much.

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